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Morning Business Briefing

Will Stephen Poloz alter the Bank of Canada’s game plan? Add to ...

These are stories Report on Business is following Wednesday, July 17, 2013.

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Awaiting Poloz
Many observers believe Stephen Poloz won’t deviate from the Bank of Canada’s playbook when he oversees his first rate announcement as governor this morning, but they’ll be watching closely for signals and to see if the economic outlook has changed.

Mr. Poloz and his policy-setting group announce their decision, and unveil the central bank’s monetary report, at 10 a.m. ET, followed by a news conference.

There will be no change to the Bank of Canada’s benchmark overnight rate, which sits at just 1 per cent, but markets are watching for any shift in what, to date, has been the key last line of the central bank’s policy statements.

That line has basically said that, depending on how things progress, “the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”

That’s a signal that, when it happens, the next move in interest rates will be up, not down.

Some in the markets believe Mr. Poloz should drop that, though most observers suggest he won’t.

“There is a risk that the BoC decides to remove its forward guidance, as the BoC could decide to start fresh with the arrival of the new governor,” said Charles St-Arnaud of Nomura Securities in New York.

“However, we believe the BoC is reluctant to remove the forward guidance as it could be interpreted as openness to rate cuts,” he added in a report.

“Moreover, removing the forward guidance would be in our view an indication that the BoC is losing confidence in the economic outlook and that it believes that there is a risk that growth will be weaker for longer.”

Here’s what to watch for this morning:

“The BoC could strengthen the language surrounding ‘a period of time’ and turn more dovish … to reinforce that rates are not going anywhere for a long time. That would achieve the goal of anchoring the front end of the curve through what is likely going to continue to be a very volatile curve environment going forward, but we see little value in dropping the bias entirely given the handicap of having introduced it in the first place and the mixed signals that could be conveyed to markets and borrowers.” Derek Holt, Dov Zigler, Bank of Nova Scotia

“We do not expect to see any surprises in the communiqué, but instead, a reiteration that interest rates will eventually be lifted when slack in the Canadian economy has been absorbed and the global economic climate improves.” Sonya Gulati, Toronto-Dominion Bank

“The condition which prompted the bias in its current state persists - high household debt. Credit growth has slowed, but the unexpected firming of the housing market through spring and early summer suggests the BoC will be reluctant to soften its warning on rates eventually rising. However, we could see the wording of the bias altered slightly to take on the character of the new governor, making it ‘his’ bias, instead of one he inherited.” Benjamin Reitzes, BMO Nesbitt Burns

 “The BoC will also publish the July monetary policy report on Wednesday and we believe that based on the weak investment intentions, that we could see a marginal downgrade of growth expectations for [the second half of 2013.] This could be enough to lower growth slightly for 2013 to 1.6 per cent from 1.7 per cent and for 2014 to 2.7 per cent from 2.8 per cent.” Nomura’s Mr. St-Arnaud

“If he wanted to be more nuanced, Poloz could reword the statement to say that rates will one day be higher, without assuring that the next move will be in that direction. But even that wording change is likely to be too ground-shifting for a first meeting as governor. Is there anywhere, then, where governor Poloz will leave his personal stamp? Possibly in the GDP forecast for 2014, where the bank’s existing 2.8 per cent call looks a tad too rosy.” Avery Shenfeld, CIBC World Markets

The Globe and Mail’s Sean Silcoff will report on the Bank of Canada’s 10 a.m. announcement.

Bernanke moves to end any confusion
Ben Bernanke spelled it out for the markets today, stressing that any “tapering” of the Federal Reserve’s exceptional stimulus program will depend on the economic outlook.

Markets have been bouncing around on the question of when the central bank will begin to pull back from its huge asset-buying program, known as quantitative easing or QE, which involves purchases of $85-billion (U.S.) a month.

Investors want to be certain that the economy and the markets can withstand any easing of the policy.

In congressional testimony today, Mr. Bernanke said the Fed’s policy-setting group could begin to cut back later this year, and end altogether next year, if economic conditions go as expected and the recovery pick up.

But QE is “by no means on a preset course,” he said in his prepared remarks.

“On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly,” he said.

“On the other hand, if the outlook for employment were to become relatively less favourable, if inflation did not appear to be moving back toward 2 per cent, or if financial conditions - which have tightened recently - were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.”

The Fed is looking for lower unemployment, with still-tame inflation. And, today, he bent over backwards to ensure that investors understand where he may or may not be headed.

“Over all, this was just another opportunity for Gentle Ben to calm the nerves of the bond market, and seems to be working in that direction,” said chief economist Avery Shenfeld of CIBC World Markets.

Carney lauded
Forget about the royal baby. Based on some of the comments this morning about how Mark Carney has united the Bank of England, some wags would like to see him become king.

Mr. Carney, who left the Bank of Canada for the British central bank, pulled off a unanimous vote at the Bank of England’s last meeting, according to the minutes released today.

“In what might be viewed as a snub to former governor Sir Mervyn King, the entire committee voted to keep the asset purchase policy unchanged, with the two remaining doves flocking to the hawkish camp,” said market analyst Chris Beauchamp of IG in London.

As our European correspondent Paul Waldie reports from London, the minutes of from the meeting of the central bank’s monetary policy committee highlighted the shift.

In each of the five prior meetings, the vote was 6-3 against boosting the central bank’s asset-buying program, known as quantitative easing or QE, with Sir Mervyn among those three.

This time, however, the vote was unanimous, with Mr. Carney seemingly bringing policy makers Paul Fisher and David Miles onside.

“Markets have taken this as a sign of intent from incoming governor Carney and a clean break from Mervyn King, and shows the influence he has already had in shifting the votes of Miles and Fisher away from more QE,” said senior sales trader Toby Morris of CMC Markets in London.

Some observers took to social media today to praise Mr. Carney for pulling that off.

Barbie sales slip
At 54, Barbie is showing her age.

Sales of the iconic doll have now declined for four consecutive quarters, according to Mattel Inc., the latest move being a sharp 12-per-cent drop in the second quarter of this year.

That followed declines of 2 per cent in the first quarter and 4 per cent in each of the third and fourth quarters of last year.

While Barbie may be losing out in the popularity contest, other Mattel brands are going strong, including American Girl, whose sales surged 14 per cent.

Over all, Mattel profit slipped in the latest quarter to $73.3-million (U.S.) or 21 cents a share from $96.2-million or 28 cents a year earlier. Sales climbed to $1.17-billion from $1.16-billion, though North American sales slipped while foreign sales rose.

Perhaps blue-haired Barbie might be next?

Bank of America profit surges
America’s big banks continue to come on strong.

Bank of America Corp. is the latest among its rivals to top analysts’ estimates, largely on trading profits.

The banking giant today posted a second-quarter profit of $4-billion or 32 cents a share, compared to $2.5-billion or 19 cents a year earlier.

Losses at its consumer real estate operations, however, deepened.

“We must keep improving, but with the consumer recovering and businesses strong, we have lots of opportunity ahead,” said chief executive officer Brian Moynihan.

Markets rise
Global markets are higher so far this morning, turning from a downbeat mood earlier in the day.

Tokyo’s Nikkei eked out a rise of 0.1 per cent, while Hong Kong’s Hang Seng gained 0.3 per cent.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were up by between 0.6 per cent and 0.7 per cent by about 9:10 a.m. ET.

Dow Jones industrial average and S&P 500 futures were up.

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